High upgrading margins boost urea
Weak ammonia prices have raised the upgrading margins on urea production to their highest since 2012.
Upgrading margins have averaged about $100/t since the second half of 2017, nearly 50pc above the long-term average, according to analysis by Argus consultants (see upgrading margins chart below).
Short payback period
The increased margin has raised the attractiveness of new urea capacity. Argus estimates that the return on investment period for a new 2,000 t/d urea plant in Russia is only 4-5 years based on current margins and an estimated capital cost of around $200mn for such plants.
Three Russian producers — Acron, Togliatti Azot and Kuibyshev Azot — have so far decided to add urea capacity to convert ammonia that is currently sold on the open market.
A fourth, Schekino Azot, is building new urea and nitrates capacity, but is also building a new ammonia plant so the net reduction in ammonia supply will be small.
Argus' urea-ammonia upgrading margin is created by subtracting the product of the ammonia price and a urea plant's ammonia consumption rate — assumed at 575 kg/t — from the urea price. This provides a measure of the added value that can be achieved in the urea market above the input cost of ammonia.
The historical average for this value is around $80/t, which needs to cover the conversion costs on a urea plant — power, chemicals and consumables, labour and maintenance — and provide a level of return to incentivise the operator to produce and sell urea, rather than selling the ammonia. At $80/t, a marginal plant can cover costs of $50-60/t.
Merchant ammonia weakness
The rise in urea margins has been driven by the comparative weakness of merchant ammonia prices, which recently fell to two-year lows, and the comparative firmness of urea (see differential chart below).
Upgrading margins averaged only about $40/t between September 2012 and August 2017, making ammonia a more profitable product than urea. But the situation has reversed since then, especially in the past nine months, which have seen a near continuous fall in ammonia prices.
Black Sea ammonia prices are about $220/t fob at present, compared with urea at $250/t fob.
Merchant ammonia trade is small, totalling only 18mn-19mn t/yr, so relatively minor changes in supply and demand have a large influence on pricing. Urea trade is around 48mn t/yr, with prices correspondingly more stable.
New ammonia plants are ramping up to full production in Russia, the US and Indonesia that will add more merchant ammonia supply. At the same time, it appears that ammonia import demand in China has fallen this year as domestic producers have increased their share of the local market.
As a result, ammonia prices are forecast to average below $230/t fob Black Sea in the coming year.
In contrast, urea prices have averaged $241/t fob Black Sea — $12-13/t higher than last year — and are forecast to average close to $260/t fob in the coming year.
Market implications
The rise in urea capacity will reduce the supply of merchant ammonia from Russia from 2021 onwards, when the new plants are scheduled to start production.
The three new units in Russia will require about 1.1mn t/yr of ammonia to run at full capacity, implying a drop of that amount in merchant ammonia supply from the country.
This is a significant amount, representing more than a quarter of the 4.2mn t of ammonia that Russia exported in 2018.
The stronger margins also raise the question of whether there are other producers that may decide to install urea units.
Trinidad and Tobago is the largest exporter of merchant ammonia in the western hemisphere, exporting close to 3mn t/yr, although analysts doubt that there is significant potential for additional upgrading in the country given the age of the plants and continuing concerns about gas supply.
But further north in the US there are a number of plants supplying the near 3mn t/yr market for direct application ammonia, and delivering ammonia to the key consuming states in the Corn Belt will become more challenging from summer 2019 onwards owing to the permanent closure of one of the two dedicated pipelines. The Magellan pipeline, running between plants in Oklahoma and terminals in the western Corn Belt, will close this year. Owners of plants linked to Magellan either need to find alternative means of transport or look to upgrade more ammonia to urea, UAN or DEF.
Related news posts
Low US natgas prices help ammonia economics
Low US natgas prices help ammonia economics
Houston, 8 May (Argus) — Nitrogen fertilizer production costs in the US are primed to hit historically low levels through the third quarter, potentially creating favorable margin and arbitrage opportunities during the offseason as bloated natural gas inventories depress key feedstock prices. Estimated ammonia production costs for most US producers tied to Henry Hub natural gas prices have spent the last 12 consecutive weeks below $100/short ton (st) on sub-$2/mmBtu feedstock prices. They should benefit from sub-$3/mmBtu natural gas costs through October, based on the 7 May Nymex futures curve. A mild winter stemmed seasonal withdrawals from natural gas storage and mitigated heating demand. US natural gas inventories exited the 2023-24 winter at the highest seasonal levels in eight years. High inventories help contain US gas prices by easing concerns about spikes in demand or supply shortfalls. Slackened natural gas demand has continued through April and has maintained downward price pressure, even as producers curtail output. The US Energy Information Administration (EIA) said that it expects inventory growth to lag average levels in the coming months as producers cut output in response to lower prices. But inventories were still expected to exit the injection season, when gas stockpiles are replenished to meet winter heating needs, at an all-time high above 4.1 Tcf, the EIA said. Natural gas is the primary feedstock for US ammonia producers, comprising on average 60-70pc of total production costs at current prices. Ammonia production costs have not spent this long below $100/st since May-July 2020, according to Argus data. Ammonia is a key feedstock for urea and UAN manufacturing. Sinking feedstock ammonia costs lowers the cost floor for upgraded nitrogen alternatives and fosters favorable margin opportunities. US producer CF Industries said during its first quarter results the energy curves between North America and Europe — with the latter a higher-cost ammonia production hub — remain wider than historical levels, creating potential arbitrage scenarios. Ammonia production costs based on the Dutch TTF natural gas day-ahead contract, which serves as the European benchmark, have averaged more than three-times more than those tied to Henry Hub since January, according to Argus data. "Longer term, we expect the global energy cost structure to continue to provide significant margin opportunities for our North American production network," CF chief executive Tony Will said during the company's earnings call. By Connor Hyde Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Pakistan's ECC approves urea imports of 200,000t
Pakistan's ECC approves urea imports of 200,000t
Amsterdam, 8 May (Argus) — Pakistan's Economic Coordination Committee (ECC) met on 7 May and has approved the import of 200,000t of urea for the Kharif summer season. The ECC did not disclose an exact timeline, but a tender will have to be issued shortly if the imports are to meet demand in Kharif, which runs from April to September with demand peaking in June-July. Pakistan occasionally enters the import market to plug supply gaps in key consumption periods. State-owned importer TCP previously agreed a deal with Azerbaijan's state-owned Socar in early December last year to source 200,000t of urea for arrival by 20 January. Domestic supplier Engro began maintenance at its 1.3mn t/yr granular urea Enven plant towards the end of April and is expected to return to production in mid-June. Pakistan's urea inventories started April at around 170,000t, but are set to be under significant pressure in June-July, data from the country's national fertilizer development centre (NFDC) show. Demand is set to hit over 800,000t in June and around 650,000t in July, outstripping typical domestic output of 520,000-555,000 t/month in the peak summer months. This has prompted the need for imports, given current stock levels. By Harry Minihan Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Chile’s 1Q24 sulacid imports drop 19pc on port closures
Chile’s 1Q24 sulacid imports drop 19pc on port closures
London, 7 May (Argus) — Chile's sulphuric acid imports in the first quarter fell by 19pc on the previous quarter owing to heavy swells at Mejillones port. A total of 875,000t of sulphuric acid was imported in January-March, down by 19pc from 1.08mn t in October-December last year, GTT data show. They were also down by 15pc on the year. The drop was mainly down to heavy disruption at Mejillones, Chile's main import hub for sulphuric acid. The port, which hosts three sulphuric acid discharge terminals, was shut for a record 40 days in January-March owing to heavy swells. The port closures led to lengthy waiting times to discharge, with some ships experiencing nearly 3-4 weeks from arrival at the port, which resulted in high demurrage costs and a lack of spot demand. China regained its position as the key supplier to Chile, with imports rising by 19pc to 342,200t in the quarter, as Asian-origin cargoes looked economically viable owing to sliding fob values, while freight rates remained firm. Imports from South Korea rose by 34pc on the quarter to 145,300t, while Japanese shipments rose by 14pc to 114,300t. Chinese fob values averaged $16/t on a midpoint basis during the quarter, down from $32/t fob on a midpoint basis in the fourth quarter of last year. South Korea/Japanese fob values averaged $8/t on a midpoint basis during the first quarter, down from $31/t the previous quarter. Imports from neighbouring Peru dropped by 34pc on the quarter on a combination of logistical issues stemming from the congestion at Mejillones and some unplanned output issues faced earlier in the year by a supplier in Peru. Imports from European countries continued to slow in the first quarter, falling by nearly 60pc on the prior quarter, as heavy buying by key Moroccan buyer OCP and transport restrictions through the Panama Canal affected trade flows. Belgium was the largest European supplier to Chile, shipping 33,000t, compared with 86,000t the previous quarter. By Lili Minton Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Canadian rail workers vote to launch strike: Correction
Canadian rail workers vote to launch strike: Correction
Corrects movement of grain loadings from a year earlier in final paragraph. Washington, 2 May (Argus) — Workers at the two major Canadian railroads could go on strike as soon as 22 May now that members of the Teamsters Canada Rail Conference (TCRC) have authorized a strike, potentially causing widespread disruption to shipments of commodities such as crude, coal and grain. A strike could disrupt rail traffic not only in Canada but also in the US and Mexico because trains would not be able to leave, nor could shipments enter into Canada. This labor action could be far more impactful than recent strikes because it would affect Canadian National (CN) and Canadian Pacific Kansas City (CPKC) at the same time. Union members at Canadian railroads have gone on strike individually in the past, which has left one of the two carriers to continue operating and handle some of their competitor's freight. But TCRC members completed a vote yesterday about whether to initiate a strike action at each carrier. The union represents about 9,300 workers employed at the two railroads. Roughly 98pc of union members that participated voted in favor of a strike beginning as early as 22 May, the union said. The union said talks are at an impasse. "After six months of negotiations with both companies, we are no closer to reaching a settlement than when we first began, TCRC president Paul Boucher said. Boucher warned that "a simultaneous work stoppage at both CN and CPKC would disrupt supply chains on a scale Canada has likely never experienced." He added that the union does not want to provoke a rail crisis and wants to avoid a work stoppage. The union has argued that the railroads' proposals would harm safety practices. It has also sought an improved work-life balance. But CN and CPKC said the union continues to reject their proposals. CPKC "is committed to negotiating in good faith and responding to our employees' desire for higher pay and improved work-life balance, while respecting the best interests of all our railroaders, their families, our customers, and the North American economy." CN said it wants a contract that addresses the work life balance and productivity, benefiting the company and employees. But even when CN "proposed a solution that would not touch duty-rest rules, the union has rejected it," the railroad said. Canadian commodity volume has fallen this year with only rail shipments of chemicals, petroleum and petroleum products, and non-metallic minerals rising, Association of American Railroads (AAR) data show. Volume data includes cars loaded in the US by Canadian carriers. Coal traffic dropped by 11pc during the 17 weeks ended on 27 April compared with a year earlier, AAR data show. Loadings of motor vehicles and parts have fallen by 5.2pc. CN and CPKC grain loadings fell by 4.3pc from a year earlier, while shipment of farm products and food fell by 9.3pc. By Abby Caplan Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Business intelligence reports
Get concise, trustworthy and unbiased analysis of the latest trends and developments in oil and energy markets. These reports are specially created for decision makers who don’t have time to track markets day-by-day, minute-by-minute.
Learn more